Is Fed’s choice tough enough?

Tags:

An insider’s insider. That’s how Patrick Parkinson, the Federal Reserve’s newly appointed head of bank supervision and regulation, has been described.

A 30-year Fed staffer, Parkinson is a long-time defender of derivatives and an architect of Treasury’s proposal to give more regulatory authority to the Fed. His appointment is the latest indication that policy makers aren’t prepared to take bold steps to corral the banking sector.

Earlier this week, Bank of England Governor Mervyn King called it a “delusion” to believe regulation can prevent speculative activities from resulting in failures.

Like Paul Volcker, King says banks need to be split in half. The essential services they provide shouldn’t be polluted by risky investment banking activities.

American regulators, however, appear willing to settle for incremental reforms likely to perpetuate the status quo. Sheila Bair is intent on ending too-big-to-fail, but when I asked her at The Economist’s Buttonwood conference whether she would support policies to proactively shrink big banks she said: “No, I don’t know how we would do that.”

At the same conference, Larry Summers bemoaned the structural problems of banking, yet on policy he hedged: “Too-big-to-fail is too-big-not-to-be-regulated.”

Daniel Tarullo, who heads the Fed’s committee in charge of bank supervision and with whom Parkinson will be working closely, also says regulation is the way to go.

If regulation is the path we’ve chosen, it would make sense to hire a strong regulator.

Yet “the credentials Parkinson brings are more political connections than supervisory savvy,” contends Fordham law professor Richard Carnell. “He’s the perfect senior staff insider to help cement the Treasury’s commitment to the Fed as systemic risk regulator. But does he have the savvy to supervise banks?”

A good question since bank regulation is an insiders’ game. “There’s no political constituency for bank soundness regulation until it’s too late,” Carnell says.

Good regulators lean against the wind, forcing banks to raise capital when times are good or restricting risky activities that put the system at risk.

Parkinson’s record suggests he’s unlikely to get tough on Wall Street. As Zero Hedge noted, Parkinson dutifully supported the Commodity Futures Modernization Act, which deregulated the derivatives market and sowed the seeds for last year’s systemic crisis. (A spokeswoman for the Fed declined to comment.)

This augurs badly. While Wall Street gets back to business as usual, Washington dithers with watered-down reforms that won’t interrupt the party. Those in charge have demonstrated a remarkable lack of courage in taking on the big banks. My hope is that Parkinson proves the exception to the rule.

Much worse than a 30 year old, the candidate is a 30 year “staffer” of the Fed.This is somewhat like handing command of the Navy, post Pearl Harbor, to a battleship admiral at the very moment your aircraft carriers have found the enemy fleet off Midway.